The Volcker Rule is just 17 months away from implementation, and with bank stocks taking a beating already this year, financial institutions are expected to be motivated sellers in 2016.
Banks took a break from selling on the secondaries market last year.
It’s the first time financial institutions have represented less than 25 percent of total market volume in the last four years, largely because compliance with the Volcker Rule – which limits US banks’ balance sheet investment in private equity – was extended to July 2017.
But with implementation now just 17 months away, banks are expected to start offloading the private equity assets still housed on their balance sheets.
“They’ve been holding off and waiting for the period when they’re essentially forced to comply with Volcker,” the New York-based managing director of a global investment firm told me, adding that he has seen a surge in dealflow from banks already this year.
And with average pricing having dropped, they are likely to be selling at a greater discount to net asset value than what they could have previously achieved. “They’ve potentially waited too long in terms of pricing,” the New York-based source said. “With how the public markets are right now, the banks may have already missed the boat.”
This is especially the case for second-tier banks, many of which had been hoping the Volcker Rule would be extended again. But market sources say that if some current deals in the works go through – such as Wells Fargo’s attempt to offload between $800 million and $1.5 billion in fund stakes – it’s hard to think the Securities and Exchange Commission (SEC) would extend the deadline on the grounds that banks need more time to comply.
“If one of the larger banks in the group breaks ranks, the SEC will think, ‘why should the others get favourable treatment?’” a NY-based source said.
Another factor expected to encourage bank sales is if the downturn in public markets continues. Bank stocks have taken a beating since the start of the year and if this gets worse, non-core assets including private equity holdings are expected to be sold for liquidity, the source told me.
Dealflow from financial institutions is not without its own complexities, though. From a buyer’s perspective dealing with banks can be more time-consuming and multifaceted than interacting with other seller types. The London-based managing director of a global fund of funds told me he once spent months negotiating with a representative from a bank only to discover that person then needed approval from several layers of upper management in order to agree to the sale, further delaying the deal.
Whatever the hurdles, banks coming back as sellers can only be a good thing for secondaries buyers. Sources put the amount of private equity assets banks still hold globally at anywhere between $49 billion to $100 billion, potentially more than double last year’s total deal volume of roughly $42 billion. And as motivated sellers, with pricing on its way down, stars are aligning for some very interesting deals indeed.
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